ECJ: Additional holiday pay for workers who earn commission?

Anticipated, but unwelcome to employers, the Court of Justice of the European Union (better known as the ECJ) handed down a judgment on 22 May 2014 that leaves a hole in the holiday pay paid to workers by many employers and, in turn, exposes them to potentially significant liabilities stretching back over many years. The case of Lock v British Gas Trading Limited (C-539/12) is yet to be interpreted by the Courts in the UK, but it is likely that it will have a significant impact on many employers who use commission as a form of remuneration.

Law

To briefly recap the law prior to Mr Lock's case : (i) Every worker has the right to be paid annual leave of at least 5.6 weeks under the Working Time Regulations (ii) Holiday pay is calculated as a week's pay for each week's leave (iii) Calculating a week's pay depends on many things including whether a worker has normal working hours (iv) The effect of the definition of a week's pay in the UK is that many elements of remuneration are excluded from the statutory definition, such as bonuses, overtime and commission (v) The ECJ has previously confirmed that normal remuneration is to be maintained during a period of annual leave, and this requires inclusion of elements of pay ‘intrinsically linked to the performance of tasks the worker is required to carry out under their contract’ (British Airways v Williams C-155/10). There are many cases going through the courts at the moment on the issue of overtime (voluntary and compulsory) and whether this needs to be included in holiday pay.

The Lock case focusses on commission.

ECJ decision

Mr Lock worked in sales. His income was comprised of salary and commission, which he would receive not at the point of sale, but when the contract with British Gas and the relevant client was completed, which could be weeks or months later. Although he would receive any commission payments that fell due whilst he was on leave, his holiday pay consisted of basic salary only.

Although Mr Lock’s case was premised upon the fact that during holiday he could not generate commission, and this adversely affected his future remuneration, the ECJ have not addressed this point directly and have instead focussed on how pay for holiday taken should be paid.

The ECJ found that there was an intrinsic link between the commission Mr Lock earned each month and the performance of the tasks he was required to carry out under his contract of employment. On this basis, not incorporating commission into the calculation of holiday pay was liable to deter him from actually exercising his right to take his annual leave, which is contrary to the objective of the Working Time Directive. The matter is now with the Employment Tribunal to determine how the Working Time Regulations should be determined in the light of this decision. It is not clear how the UK courts will interpret this, but they may adopt a 12 week reference period which applies under the Working Time Regulations.

Implications and options for employers

Many employers in a wide range of industries have commission based schemes, and this case will therefore have a wide-ranging effect. In this case, commission accounted for 60% of Mr Lock's income so any increase in holiday pay for employers in this position could be expensive.

The main remedy available to employees is to bring a claim for unlawful deduction from wages in respect of holiday pay. Claims of this nature must be brought within three months of the underpayment complained of or of the last in a series of deductions. In theory employees with long service may have claims stretching back to when the Working Time Regulations were introduced in 1998, although it has been argued that the courts should impose a limitation period of 6 years.

For some employees, the sums may not be worthwhile pursuing particularly when faced with Tribunal fees to pay at current rates of £160 to issue a claim and £230 for the hearing. However it is anticipated that there will be a number of group claims, in some cases backed by Unions, and that those claims will be lodged and ‘stayed’ pending clarification of the position by the UK courts.

One option for employers is to await the decision of the UK courts and then apply it in due course. This means that the value of any back pay claims brought will increase during this period. This may be risky if many workers earn commission and/or commission is a material component of remuneration. It is particularly risky where workers have long service as their claims may go back for many years.

Another option is to address the issue of holiday pay now in the hope that this will mitigate future liabilities. For example, if holiday pay is increased now to take into account commission so that there is no deemed ‘underpayment’ from now on, any claims by employees for back pay would need to be brought within 3 months of the last ‘underpayment’ (i.e. the last date on which holiday pay was incorrectly paid). With time the prospect of back pay claims will diminish.

For many employers, this will be complicated. For example, is the question what commission is generated during the reference period (whether 12 weeks or otherwise) or what commission is actually paid to the worker? In some industries commission is paid immediately, and in others there is a long pipeline with various conditions attached to the payment of commission.

The working time clock is ticking and employers must now consider whether to press the snooze button, or whether to wake up to the ECJ's alarm bell.